Oregon banks feeling squeezed, but may fare better than others

Joe Mosley

Sunday

Feb 15, 2009 at 12:01 AM

Across the country and around Oregon, the banking industry struggled through a brutal 2008 underscored by crises in the housing and mortgage markets, and by the spate of high-profile failures and mergers that led to a federal bailout.

And 2009 is not expected to be much better.

One banking industry analyst Gerard Cassidy of RBC Capital Markets in Portland, Maine revised his earlier prediction of 200 to 300 bank failures over the next few years, by saying last month that as many as 1,000 banks may fail in the United States through 2013.

Standard & Poors Ratings has a negative outlook for the banking industry through 2009, pointing out that banks remain vulnerable to “systemic shocks” such as liquidity issues and low consumer confidence.

Oregon has not been hit as hard as many parts of the country by an ongoing epidemic of mortgage defaults, or the related decline in home values. Lenders in the state didn’t issue as many high-risk mortgages at the height of the real estate bubble, and home prices in Oregon didn’t inflate as dramatically as those in many other regions.

But Oregon’s banks were not immune to the industry’s 2008 troubles. Last fall, 10 of the 22 banks that had been examined by state and federal regulators in the preceding 12 months received “less than satisfactory” composite scores in the confidential rating system used by bank examiners.

Lisa Morawski, spokeswoman for the Oregon Division of Finance and Corporate Security, says more recent bank examinations have shown a similar trend a mix of institutions that are surviving the economic downturn and some that are struggling.

“It’s going to take some time (for Oregon banks to regain their footing),” she says. “But a lot of the banks are being very proactive in trying to address their troubles.”

From the perspective of consumers, Oregon banks should continue to be considered a safe bet, according to the agency. Overall deposits at the 35 banks based in Oregon were still increasing and the FDIC has increased insurance coverage for bank deposits to $250,000 through the end of 2009.

But profits are expected to remain stifled as banks pump money into loan-loss reserve funds, hedging against the possibility that additional home mortgages or development and construction loans will be pushed into their uncollectable files.

Brian Carlin, chief financial officer at Eugene’s LibertyBank, says banks that aggressively addressed their problem loans by adequately funding their loan-loss reserves are being responsible. Accepting marginal profits or even losses in the short term is a trade-off for longer-term stability, he says.

LibertyBank, for example, reported losses during each quarterly reporting period of 2008 a total of $6.3 million. Those losses were the result of increases in the bank’s loan-loss reserves and subsequent charge-offs of uncollectable loans.

Carlin says institutions such as LibertyBank which has specialized in development and construction loans, and has branches in the boom-and-bust real estate markets of central and southern Oregon have been more affected by current trends than banks with other focuses.

But he sees a resurgence in housing markets and a bottoming-out of unemployment rates as the keys to improved fortunes at all Oregon banks. Both will boost confidence in the economy, which will in turn trigger investment and spending.

D.A. Davidson & Co., a Montana-based financial consulting firm, has created its own index of 37 banks and thrifts located primarily in five Western states.

And while the Nasdaq Bank Index had its worst monthly performance on record in January a drop of 21.8 percent Davidson’s index of Western banks fared even worse, with a decline of 35.6 percent, according to the firm’s February Banking Industry Update.

Three of the six Oregon banks in Davidson’s index Bank of the Cascades and Columbia River Bank, along with West Coast Bank in Lake Oswego had nonperforming asset ratios higher than 7 percent. But the two banks with closest ties to the Eugene-Springfield area Eugene’s Pacific Continental Bank and Roseburg’s Umpqua Bank had among the lowest nonperforming asset ratios in the index.

Morawski, the state Finance and Corporate Securities spokeswoman, says Oregon’s banking industry has grown dramatically over the past couple of decades and it would not be unusual to see some consolidation, even bank failures, during the economic downturn. .”

At LibertyBank, Carlin agrees that consolidation is likely among Oregon banks, but says he doesn’t expect “anything dramatic in the next three to six months.” He says Willamette Valley banks are less likely than those in central and southern Oregon to be absorbed by other institutions.

Florence-based Siuslaw Bank has been among the most stable of seven banks based in and around Lane County. It recently received high ratings for “safe and sound” banking practices from Bankrate.com a commercial financial ratings firm based in New York.

Siuslaw CEO and Chairman Johan Mehlum wants to be optimistic, but says even good customers at well-run banks can run into trouble during dire economic times, and be unable to repay their loans.

“Hopefully, the banks in Lane County have played it safe and conservative, and we will all survive,” he says. “We will see what happens.”

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